The Tax Inspector General for Tax Administration (TIGTA) has issued a report which notes that some tax-exempt organizations have substantial delinquent payroll taxes.

The objective of the TIGTA audit was to determine if, and to what extent, tax-exempt organizations have federal tax debt. While organizations that have federal tax-exempt status are not required to pay income taxes, they are still required to collect and submit payroll taxes. Organizations that are failing to pay their taxes are creating millions of dollars in lost revenue.

Report findings. TIGTA found that a fairly small percentage of tax-exempt organizations are not paying their required taxes. However, the 3.8% (of approximately 64,200 organizations) who are not paying their taxes have nearly $875 million in federal tax debt. Approximately 69% of the nearly $875 million in federal tax debt is comprised of payroll taxes and related penalties and interest.

IRS has taken collection action on all 25 tax-exempt organizations and most officers of the organizations that TIGTA reviewed. The Code does not authorize IRS to revoke an organization’s tax-exempt status for failure to pay payroll taxes.

TIGTA recommendations. The report recommended that the IRS Director of Exempt Organizations Division: (1) coordinate with IRS’s Small Business/Self-Employee Division management to receive relevant collection information; (2) periodically complete analyses to identify tax-exempt organizations that may be abusing their tax-exempt status, and conduct tax examinations if necessary; and (3) work with the Department of the Treasury to evaluate a possible legislative proposal to strengthen IRS’s ability to enforce compliance by tax-exempt organizations.

IRS disagreed with the first two recommendations, but agreed to work with the Department of the Treasury on the third recommendation.